Will reformation of credit cards truly help Americans?

closeup of a credit card in a man's handThe Obama administration enacted reform laws on credit cards as a way to protect citizens from unscrupulous lenders. The crash of the lending industry came last year and was a huge contributor to the recessionary period. Prior to that, lenders were giving out loans and credit without cause, and without making sure the money could realistically be paid back. Due to the lack of careful lending, creditors started suffering when huge amount of customers began defaulting on loans and credit card payments.

The credit card industry

In a panic, credit card companies began using tactics that were highly questionable. They started raising interest rates without cause. They began slashing limits of even their good customers. They began charging fees for just about everything they possibly could. In the end, it left a credit industry that was not well looked upon by the American public.

The Obama administration stepped in recently to push for credit card reform laws. The aim was to create a watchdog-like service that kept lenders on the up-and-up. Gone are the days of lenders being largely “unregulated” and free to do as they please, depending on the market.

The new credit card reform

Although the laws governing credit cards have been signed into effect, there are still some concerns. Many analysts are optimistic about the changes, but they are cautious to have full confidence in the system just yet.

Here are some issues that have yet to be sorted out:

  • Higher interest rates from the beginning. Putting a limit on interest rate increases is causing credit card companies to raise those rates right from the start. Because they can no longer raise rates without a 90-day notice, they will compensate in other areas. Consumers will also see a rise in APRs on their existing credit cards, particularly if they have any trouble in their past payment histories. Consumers need to remember that credit card companies still have the ability to raise interest rates, although there now is a universal grace period.
  • Annual fee structures will change. One of the perks of opening a credit card was the ability to avoid annual fees or interest changes for customers who consistently made on-time payments. This is likely to change. Currently, only about 20 percent of U.S. credit cards have annual fees, however that amount is expected to sharply increase in coming months. The estimated annual fee will be anywhere from $50 to $100.
  • Banks are looking to take advantage of grace periods by closing the window of time consumers can take advantage of them. Many banks are looking to compensate for lost revenue by charging interest from the day of purchase, instead of giving people the normal 21-28 day grace period to pay the balance in full without additional charges.
  • The new Obama administration laws still do not regulate fees on balance transfers, cash advances or late payments. Currently there is a penalty rate for late payments that is averaging 28 percent. That average is expected to rise to the mid-30s by the end of the year, as credit card companies are scrambling to make money where they can.

The reformed laws

Laws that govern credit cards were sorely in need of change, and the Obama administration put these changes into effect at the right time. Unfortunately, there is still a long way to go for companies to continue lending and make a profit, while not taking advantage of borrowers.

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